The ultimate contrarian’s bets for 2014

The case for buying what everyone else hates

Pariah is a super-exclusive, super-elite (and completely hypothetical) fund which operates on a simple strategy. “We invest in the stuff everyone hates, and we avoid the stuff everyone else loves,” explains one of the managing partners, who was speaking on condition of anonymity from the fund’s headquarters, in Dick Cheney’s old secret undisclosed location.

This year, says the partner, they are finding easy pickings.

There are three sectors that all stock market investors seem to hate, he says.

The Philadelphia Gold & Silving Mining index
XAU, +1.98%
dipped below 80 shortly before Christmas, down 65% from the all-time peak of 230 seen in April, 2011. (It has since ticked up slightly to about 87, still down about 62% from the peak). At current levels the index of gold mining stocks has massively underperformed the price of gold itself, and represent gold mining stocks are effectively a very cheap bet on the gold price.

Gold mining companies overspent and overinvested when the gold price was booming. But now that gold has plunged they are scaling back. Peter Bennett, a veteran investment manager at Walker Crips Group in London, has an old rule: Always buy a durable asset class once it has fallen by about two-thirds from its peak. Over a decent period—usually a few years—you will make good money most of the time.

Investors also hate the broader commodities and natural resources sectors, he says. “There’s a lot to like here because there’s so much that everyone hates,” says the partner. “Corn just had the worst year in at least fifty years. Fund managers hate commodities and energy stocks. They have one of the lowest exposures to energy since records began.”

In the event they’ve picked an investment in the SPDRs S&P Global Natural Resource stocks exchange-traded fund
GNR, -0.51%
to represent a basket of the equities across the industry.

Meanwhile it is steering well clear of the most popular sectors, such as technology stocks and banks.

Pariah is also making some big bets on a regional view. In a nutshell, it loves emerging markets and hates everywhere else — because all the other money managers have taken the opposite view.

“Emerging markets were the only major global stock group to lose ground last year,” says the source. The MSCI Emerging Markets index lost about 2% in 2013 even when counting reinvested dividends, the Brazil, Russia, India and China “BRIC” index lost 3% and the index of Latin American stocks plunged 13%.

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